Orange Company, a domestic company, owns 100% of the stock of a Mexican subsidiary, Agua.  Agua manufactures machine parts which are used by Orange in the assembly of finished machines. Approximately half of the different component parts manufactured by Agua could be purchased by Orange from third party suppliers. The other component parts, however, are specialty goods not readily available from third party manufacturers. One of the most important components, Part A, is purchased both from an unrelated Canadian supplier, and is manufactured by Agua. The Orange Company Tax Department is reviewing the transfer pricing methodologies used between Orange and Agua. Please answer the following questions that are raised as part of the review

2. How should the transfer price be developed with respect to goods manufactured by the subsidiary which are also made available by third party suppliers?
4. What considerations should be given with respect to Part A?
6. How should a transfer price be developed for components not made available by third party suppliers?

Orange Company also provides services for Agua. Most of the services are of an administrative nature such as accounting, IT, and benefits administration. How should Orange develop transfer pricing with respect to those services? It has been billing the subsidiary for those services at cost. Is that ok to continue?

Answer rating: 100% (QA)

Transfer Pricing Methodology for Orange and Agua 1 Goods Manufactured by the Subsidiary and Available from Third Parties For these components the arms ... View the full answer